Question

Fowler, Inc., just paid a dividend of $2.45 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year, indefinitely. Assume investors require a return of 10 percent on this stock. a. What is the current price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What will the price be in five years and in fourteen years? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a. b. Current price Price in five years Price in fourteen years

Answer 1

Solution: a) PO=D1/(r-g) Dividend at the end of year 1 51.45 D1 Price today 2.45*1.05/(0.1-0.05) PO Price at the end of year 5 P5 Price at the end of year 14 b) P5=PO* (1+g)^5 P14 65.66 required return 51.45*(1+0.05)^5 growth rate P14=P0*(1+g)^14 51.45* (1+0.05)^14 101.87